Why the WTO Is Going Nowhere

The system itself is broken.

By

September 4, 2003

I. A Wrong-Way World

Watch for William Greider's forthcoming book The Soul of Capitalism: Opening Paths to a Moral Economy, due in bookstores in early September. Click here for info on the book and original reflections and riffs from Greider.

The mighty beacon of globalization was pushed off center stage by the war on Iraq but is returning with a strangely diminished glow. Only now the all-encompassing lamp that was going to light the new millennium looks more like a flickering candle. The world’s 146 trade ministers are gathering in Cancún this month with their standard declarations of great intentions. They are working on a new global agreement–the Doha Round of the World Trade Organization–dedicated to fostering greater trade and growth, liberating commerce and eradicating poverty, all the familiar pieties. Yet the lack of enthusiasm–and lack of momentum toward any agreement–is felt around the world.

Representatives of the wealthiest nations are anxious to achieve something, if only a rhetorical victory that might lighten the gloom of global investors and producers. They usually get their way in trade rounds, but great complications lie in their path. The developing countries are also desperate for concrete advances–genuine market-opening concessions from powerful nations like the United States–and the weak are gradually acquiring a stronger, more skeptical voice. But having been finessed and duped so many times in the past, the poorer nations remain quite fearful that the big boys will roll them once again amid the fiendish complexities of trade negotiating. So much has been promised for globalization, so much not delivered.

The new millennium turns out to be an inhospitable time for selling new promises about the wonders of global economic integration. The reason has nothing to do with tariff barriers or policy particulars of the Doha Round. The great engine itself–the globalized economic system–is sputtering, giving off clanking noises that suggest the machine is seriously malfunctioning. Developing countries that enjoyed robust expansion in the past decade are stalled out (with the important exception of China). But so are the industrial giants–Europe, Japan and the United States, all struggling with varying degrees of stagnation or worse.

The dynamic boom in global investing and bank lending that fueled far-flung industrialization during the nineties has tapered off dramatically. Actually, the process seems oddly reversed. Instead of the center lending capital to the developing periphery, capital is flowing back to the center–that is, the United States. Even poor nations, China in particular, are lending the United States huge quantities of surplus capital, mainly to keep America afloat as the world’s buyer of last resort. If the United States falters and can no longer absorb such huge flows of exports from other nations, the entire system is in deep trouble.

This fragile condition–stagnation and the risk of worse–tends to drive nations farther apart, not closer, since governments naturally try to defend their own producers from the general downdraft. Not a good time for forging new harmony. To reach meaningful agreements at Cancún, many countries–including the United States–will have to make significant concessions that injure some folks back home, sacrificing selected domestic sectors to achieve a “greater good” for the global system and giving greater powers to the WTO. But profiles in courage are not on the agenda at Cancún.

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Still, the globalizing imperative has enduring momentum, especially among governing elites in the United States and Europe, and so the happy talk proceeds. Driving the politics, as always, are the business and finance multinationals, whose objectives are no longer really about tariff reduction. Their principal agenda is imposing a complex set of nontrade rules covering investment, property rights and domestic sovereignty that will profoundly limit the policy choices of those countries where the factories are built, the capital invested. Leaders from the wealthiest nations keep trying to implant these rules in the WTO’s authority, arguing that additional agreements must be achieved, lest globalization lose its “Big Mo.”

In a more rational world, these leaders would recognize that they have the problem backward. Instead of pushing reflexively for still more trade agreements, they should be calling for an emergency summit of major economic powers to confront the far larger dangers of the stagnant global economic system, straining with deep and unsustainable imbalances. Solutions would require not only a joint commitment to major economic stimulus but also some painful adjustments among the major trading nations–greater domestic consumption by exporting nations abroad and less borrowing to buy in the indebted United States. This shift would be extraordinarily difficult to achieve in the best circumstances. Currently no one in authority, above all the US President, wishes even to acknowledge it. So the lemmings are off to Cancún.

II. Irreconcilable Differences

Economist Jagdish Bhagwati of Columbia University has been one of the most visible and resolute intellectual advocates for free-market globalization, but lately he sounds a lot like Lori Wallach, the brainy lawyer who leads Global Trade Watch. “The process of trade liberalization is becoming a sham,” Bhagwati wrote recently in the Financial Times, “the ultimate objective being the capture, reshaping and distortion of the WTO in the image of American lobbying interests.”

Wallach and other leaders of worldwide popular dissent have been making the same argument about bait-and-switch diplomacy for a decade. “Oh, absolutely,” Bhagwati exclaims. “People like Lori Wallach are right.” The multinational corporate interests essentially hijacked the pure “free trade” principles Bhagwati espouses and turned “free-trade agreements” into their own agenda for a densely layered legal code–investment rules that impose a straitjacket of do’s and don’ts on developing-country governments.

The rights of foreign capital and corporations are to be expanded; the rights of sovereign nations to decide their own development strategies steadily eliminated. A country must not require multinationals to form joint ventures with domestic enterprises. It must not limit foreign ownership of its natural resources. National health systems, water systems and other public services must be open to privatization by foreign companies. Underdeveloped countries must, meanwhile, enforce the patent-rights system from the advanced economies to protect drugs, music, software and other “intellectual property” assets owned by wealthy industrialists. Any poor nation that dares to resist the WTO rule will face severe “sanctions”–huge cash penalties–and possibly de facto expulsion from the trading club.

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“The developing countries are scared out of their wits now,” Bhagwati says, “because they don’t understand what they’re being forced to sign. The agreements are going way outside the trade issues and involve a helluva lot of things like your access to oil, your access to intellectual property and capital controls…. When I looked through the investment agreements, it was worse than reading my insurance policy for the fine print. I couldn’t make anything out of it, and I’m a reasonably informed person, a pretty smart economist as they go.”

Exactly. Obfuscation is power. The politics of trade resembles a maliciously lopsided power play in which the wealthiest industrial nations press the weak to accede to their terms or else get nothing back at the bargaining table, and very possibly lose their access to foreign capital or development aid. Trade ministers from poor countries naturally resist, but they don’t have deep squads of corporate lawyers to argue the fine points and they don’t want to be the troublemaker accused of blowing up the trading system.

The stakes for poor nations, as Wallach explains, are enormous. “If these rules go through, that’s the end of it for developing countries,” she predicts. “It pulls up the ladder from them, because all the development tools the United States and Europe used in their own industrial development would be removed.” Those tools include protective tariffs to shelter infant industries, directed state subsidies, controls on the inflows of foreign capital to stabilize the economy, regulatory powers over industry and many other provisions. The US government used all these measures aggressively and brilliantly during the nineteenth and early twentieth century to build the nation’s economic power.

Unlike global reformers like Wallach, Bhagwati opposes labor and environmental standards in global agreements for roughly the same reason most developing countries do. They regard them as extraneous to trade and as further injuries to their sovereign discretion and comparative advantage of low wages. “Look, I am a social democrat,” the Indian-born, English-educated professor insists. “I approve of unions. I am in favor of human rights and environmental values.” But these matters should be developed in domestic law, not by international agreement, he argues. The advocates of the so-called social issues “have gotten onto what the business lobbies are doing and are now trying to advance their own goals through the trade agreements. And the multinationals are so keen to get markets…they’re like salivating dogs, they will make concessions on labor rights and the environment, the minimum necessary, just to get you out of the way. They’re a bunch of cynical bastards.”

All the lobbying pressures–business and social–are sowing a new skepticism toward international agreements among the developing nations, Bhagwati warns. “The poor countries used to see multilateralism as a defense of the weak,” he explains. “That’s our traditional argument, remember. With multilateral institutions, we would be able to contain the big guys. But now, because all these extraneous nontrade issues are being brought in by newer and newer business lobbies, people in developing countries are beginning to feel crowded. They feel this turning into an assault on the weak–disguised as multilateralism. So I think we need to wake up.”

In the run-up to Cancún, the “big guys” are pursuing a shrewd divide-and-conquer strategy that co-opts individual nations (Singapore and Chile, most recently) by signing them up for “bilateral” agreements with the United States on terms that include the same restrictive investment rules the multinationals want in the next WTO agreement. “It’s sort of Leninist, because they’re picking off countries one by one,” Bhagwati observes. This American tactic is designed to weaken the coalition of poor countries in the negotiations while creating an appearance of broader support for the multinationals’ investment rules. Chile, for instance, has accepted a prohibition on capital controls even though it has skillfully employed capital controls itself over the past twenty years to engineer its successful development. Other nations may not get the chance.

From their side, developing countries are pursuing WTO issues that are genuinely about free trade–removing the protectionist barriers in the wealthiest countries for domestic agriculture and the pharmaceutical patent monopolies that impose exorbitant pricing on lifesaving medicines. More productive countries like Brazil want to eliminate the US, European and Japanese tariff barriers that block Brazilian food exports. Virtually all developing countries attack the awesome production subsidies that the advanced governments provide their domestic agriculture. The poorest nations, for instance, argue that subsidizing capital-intensive US agriculture allows agribusiness exports to underprice and destroy less advanced farming in Africa and elsewhere, while American farmers are compensated with price supports. Mexico’s peasant farmers are currently being devastated in this manner by American corn, thanks to NAFTA.

These agricultural issues have been on the trade agenda of poor nations for at least fifteen years, but at every turn they have been denied any real progress. The Uruguay Round, completed in 1994, did establish limits on agriculture subsidies, but the caps were set so high that the United States could continue to increase its farm subsidies enormously without any violation. Since then, the big guys have issued a running series of paper promises and formal commitments, none of which amounted to more than empty pieties. The US and EU reps issued a new declaration of intent a few weeks before Cancún–one without any hard numbers or deadlines. In other words, more words but no actual commitment.

Does anyone believe that George W. Bush intends to depart from this pattern, that is, to throw American farmers and agribusiness over the side? Brazil is a prime example of the dilemma facing US trade negotiators. If the United States proposed genuine concessions on agriculture and some industrial issues, Luiz Inácio Lula da Silva, Brazil’s new Workers’ Party president, might conceivably be persuaded to compromise on some of the other things Americans want for the WTO, and especially for the proposed Free Trade Area of the Americas, in which Brazil holds the decisive position. As Wallach explains, Brazil “doesn’t want US interests taking over Amazonia’s timber, oil, biodiversity. It wants to protect its national health system from US HMOs. It has to insure that a grandiose WTO expansion doesn’t occur at Cancún.”

But–but–Lula also needs economic growth, more jobs and rising incomes, to succeed as president. Right now the Brazilian economy is stuck–stabilized but not growing. If the United States offered substantial concessions on agriculture, that would be hard to turn down. Brazil wants major reductions in the US tariffs, as high as 100 percent, blocking its citrus exports. It wants America to eliminate subsidies for soybeans and open wider the US market for Brazilian beef and other foodstuffs. The Administration rhetoric suggests these matters are ripe for serious negotiation.

But Brazil’s wish list makes clear why such reforms won’t happen, given President Bush’s priorities. Soybeans are Missouri, Iowa and Arkansas, among other Republican-voting states. Beef is Kansas, the Dakotas and the Solid South. Oranges are Florida. Open markets for oranges would allow Brazil’s abundant and efficient citrus production to devastate Florida. Karl Rove would not permit it; neither would Florida’s governor, brother Jeb. Whatever gets said by the US Trade Representative, whatever declarations are issued at Cancún, count on this: There will be no agriculture deal for developing nations, not one that is real, not one that can even be whispered about, at least until long after the 2004 election.

The Doha Round is supposed to conclude in early 2005, but Bhagwati predicts it will be postponed two years and possibly longer. Cancún, he suggests, “will just be smoke and mirrors, just another guidepost in the marathon. They will have good speeches, goody-goody stuff. They will make noises in the direction of the developing countries, but this is not the place where they will be negotiating anything. This is why I’m a bit worried.”

III. The Odd Couple

China is the new “bad boy” of the global economy, having displaced Japan as the aggressive emblem of a trading system ferociously out of balance. China’s low-wage production is not only grabbing vast market share from other poor countries in low-end goods, but its increasing sophistication in advanced manufacturing is siphoning off millions of high-wage, high-quality jobs from advanced economies, especially that of the compliant United States. China’s annual trade surplus with the United States has surpassed Japan’s and now exceeds $100 billion. The US economy, meanwhile, is borrowing capital from abroad to sustain its consumption with an unsustainable appetite for debt–5 percent of GDP this year, headed for 6 percent next year.

Leading US cheerleaders for freewheeling globalization (including Federal Reserve Chairman Alan Greenspan) have begun scolding China for excessive ambitions, just as they once criticized Japan, to no avail. The National Association of Manufacturers issued a report warning that 2.3 million US manufacturing jobs have disappeared since 2000, largely due to international competition (not entirely from China). The United States risks losing “critical mass” in manufacturing, says the NAM. A Defense Department technology-advisory group confirmed that so much “intellectual capital and industrial capability” has been moved offshore, particularly in microelectronics, that the Pentagon is dangerously dependent on foreign producers to make its high-tech weaponry. Fortune lamented further that the lost American jobs now include upscale, college-educated occupations–software design, accounting, electrical engineering. When labor leaders protested devastating losses of blue-collar jobs, they were dismissed as protectionist. But losing high-tech “brain work” wasn’t what the cheerleaders had in mind.

There is one other embarrassing reality the globalizers don’t wish to mention: China is also now America’s leading creditor. Building up huge reserves of surplus capital, China pumps much of the money into loans back to America in the form of US Treasury bonds. China now holds $290 billion in US government debt, more than any other foreign lender, according to Chen Zhao of the Bank Credit Analyst Research Group. “The flow of Chinese savings has enabled Americans to borrow and spend more,” he explained in the Financial Times. “China is glad to see Americans going on another shopping spree. Its factories are cranking up production at an unprecedented pace…. China’s exports to the U.S. jumped 35 percent in the first quarter” compared with the first quarter of 2002.

China and America are thus bound together in a very odd relationship–the poor country lends hundreds of billions to the world’s largest economy so that affluent Americans can keep buying the poor country’s goods–goods typically produced in the offshore factories built by America’s own companies. If this seems a monstrous anomaly, it is actually the logical outcome of how US-led globalization functions. This recycling of capital and goods didn’t start with China, though China represents the most extreme example. Elite experts claim it is a “virtuous circle” in which everyone benefits, but that is American hubris. Their reasoning ignores the essential transaction: China winds up with the accumulated profits. The United States winds up with the accumulated debt.

In present circumstances, this producer-debtor relationship looks like a dangerous tripwire, in which either China’s financial excesses could ignite an endgame crisis for the United States or–vice versa–America’s excesses could spill over as a crisis for China and the world trading system. Cassandras (like myself) have argued for some years that America’s negative balance sheet–buying more than it produces and borrowing to do so–will eventually force an ugly reckoning. With its ever-swelling trade deficits, the moment of painful adjustment draws closer, but the debt cycle is unlikely to stop until creditor nations conclude that the US debt position is too dangerous and start withholding their capital. Alternately, if China’s overheated economy gets mired in financial disorder or inflationary pressures, it might need to bring its capital home–thus pulling the plug on American consumers and the “buyer of last resort” for the global system at large.

Nobody knows when or how this may occur. Morgan Stanley economist Stephen Roach foresees the moment approaching when US gross national savings turns negative, and that could be “the flashpoint that sends a wake-up call to world financial markets.” The dollar falls sharply, the US economy sinks into a deep, unambiguous recession and so does the world. Roach wants nations to call a global summit that confronts the danger and accepts that the basic problem is in the system’s out-of-whack design, not the overreaching desires of poor nations like China.

“The world has to stand up and say, It’s not China, it’s all of us,” Roach explains. “This is a global industrial problem. Sixty percent of the Chinese export growth is not China. It’s coming from all the multinationals that put production in China–Western companies, European, Japanese, American. This is big stuff. A big change is coming, I don’t know when.”

What might world leaders do if they had the courage to act before crisis engulfs the system? As an economist, Roach describes the imbalance as a simple accounting problem. Americans must consume less and save more, while export-led economies must do the opposite–shift more of their national savings into domestic consumption, including for the purchase of more American-made exports. His description is accurate as far as it goes but skips over the hard part–how to get there in present circumstances. If US consumption were severely restrained right now, the economy would crater, but so would those of Europe, Japan, China and the rest of the world. “Americans aren’t going to like that,” Roach acknowledges. “But bad as it will be for Americans, this situation will seem truly awful in the rest of the world.”

A less brutal, more politically plausible response requires a two-stage strategy–first, a shared agenda of economic stimulus to restore global growth, but accompanied by enforceable commitments to reduce the exporting nations’ lopsided reliance on the US market once stable growth is restored. In other words, the United States has to acknowledge its weakness (not an easy pill for Washington egotists to swallow), but America must also be prepared to force the issue of its swelling trade deficits; that is, to employ emergency measures that do indeed reduce the US dependency whether other nations wish to cooperate or not. The mere mention of such trade measures would stun the world–and might convince trading partners that the old order is truly dead.

Even with global agreement, this strategy will take years to fulfill, because it requires virtually every economic power, starting with America, to reverse long-used practices of industrial policy. The global factories exist. Realigning global production to insure more balanced trading relations cannot be achieved by simply lowering the US dollar or punishing a few outstanding economies like China’s. US trade policy was born in the cold war, when national-security strategy encouraged a generous flow of economic subsidies to allies. That rationale, long out of sync with reality, requires our trading partners to grow up a bit, while Americans experience some belt-tightening too. Above all, the governing elites have to abandon the fiction that what’s good for US multinationals is good for the US economy. It ain’t necessarily so.

American politics is not ready to face the bad news–neither probably are the American people. And the Bush presidency, founded on false triumphalism, is certainly not going to disturb the myth of America as the supreme economic powerhouse. Perhaps the best we can hope for right now is that a few brave voices, maybe among the Democratic candidates, will begin the hard task of truth-telling. Globalization is papered over with so many fallacies that any politician who describes reality risks ridicule. Nevertheless, the country badly needs to hear the truth. Win or lose, a politician who finds the courage to shatter failed myths is admired in the long run, remembered as a true statesman.

Frankly, having described what I think ought to happen, I am most doubtful that it will. Deep, wrenching shifts in political thinking do not usually occur without lots of painful friction first. I expect US elites and others around the world will have to see some strong, bloody evidence that their system is broken before they’ll act. We can be sure of this much: None of these grave matters will be discussed at Cancún.